Question

You just overheard your friend say the following: “Poor countries like Malawi have no absolute advantages. They have poor soil, low investments in formal education and hence low-skill workers, no capital, and no natural resources to speak of. Because they have no advantage, they cannot benefit from trade.” How would you respond?

Short answer

Because of comparative advantage, if Malawi do not have absolute advantage, poor soil, low investment in formal education etc. still Malawi can produce goods and services at lower opportunity cost.

Step-by-step solution

Step 1. Introduction

The ability to produce a product at a relatively lower cost or to produce a higher quantity at the same cost is known as absolute advantage. While, the ability to produce at a realtively lower opportunity cost is known as competitive advantage.

Step 2. About absolute advantage and comparative advantage.

Most economist would respond saying that what matters is not absolute advantage but comparative advantage. Comparative advantage came into existence as a solution to the problem which can take place when a nation tends to have absolute advantage in all the commodities while others do not. Though Malawi do not have absolute advantage but because of comparative advantage Malawi can produce goods and services at an efficient and cheaper rate at lower opportunity cost.